Housing Slump to Ease in 2007

Don Hogsett, December 18, 2006

Washington — With interest rates ticking up and consumers still jittery, a broad-based slowdown in housing is forecast to extend into 2007, with home sales falling for a second straight year, the National Association of Realtors (NAR) is reporting.

In an annual forecast of what's to come, the home sellers forecast sales of existing homes — which account for more than two-thirds of all housing activity — will decline by 8.6% to 6.47 million units in 2006, and fall back another 1% in 2007 to 6.4 million units.

Even harder hit is the market for costlier new homes, where sales are forecast to drop by 17.7% this year, before tumbling another 9.4% next year. “Much of the contraction in the new housing market results from cuts in builder construction” as they work off inventories of unsold homes at lower prices,” said David Lereah, NAR chief economist. “In addition, high construction costs in many areas are minimizing potential profits.”

With new home sales under heavy pressure, housing starts are forecast to drop by 12.3% this year, and fall even further, by 15.1% in 2007, said Lereah. “Roughly three-quarters of the country will experience a sluggish expansion in 2007, while other areas should continue to contract for at least part of the year,” he noted.

Taking a look at home prices, which declined for the first time in years, jolting homeowners, Lereah said, “Most of the correction in home prices is behind us, but general gains in value next year will be modest by historical standards.”

While the market for existing homes will continue to contract moving into the new year, sales should touch bottom and start climbing back later in the year, he said, and by the fourth quarter sales of existing homes should climb by 4.6% from their cyclical level of the 2006 closing quarter.

Rising interest rates will put a damper on the market. The rate for a 30-year fixed rate mortgage is forecast to gradually increase to 6.7% by the fourth quarter of 2007, up from a recent level of 6.1%, an increase of 60 basis points, or six-tenths of a percentage point — which translates to roughly a 10% increase in the amount of cash a homeowner will pay to cover his mortgage costs.

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